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Future Fund Rejects Telstra Moves

By

Lyndal McFarland And

Rachel Pannett

Updated Nov. 22, 2010 12:01 a.m. ET

MELBOURNE—Relations between
Telstra Corp.
and its biggest shareholder, the Future Fund, hit a new low Friday when the government-owned fund voted against all resolutions at the telecommunications group's annual general meeting in a move other investors took to signal the fund had lost confidence in the group's board.

Telstra CEO David Thodey looks out over the auditorium before the start of the company's annual general meeting in Melbourne.

Telstra Chairman
Catherine Livingstone
told stunned investors at the group's Melbourne shareholder meeting that the 69 billion Australian dollar (US$68.19 billion) Future Fund, which holds a 9.9% stake in Telstra, had voted against Telstra's remuneration report, planned changes to the group's constitution and the appointment of
Nora Scheinkestel
as an independent director to its board, although after proxy votes the resolutions were still passed.

Future Fund Chairman
David Murray
said the fund's "sole consideration" in voting against the resolutions was preserving shareholder value and the decision to oppose Ms. Scheinkestel's appointment wasn't personal.

"It wasn't about the director herself, it was about our push for more telco experience and that was also relevant to our vote on the size of the board, because if you add one now then reduce the number...you can't get telecommunications experience onto the board," Mr. Murray said in an interview.

"We're a seller of Telstra stock to rebalance our portfolio, but we're not allowed to disrupt markets, that's part of the rules and that means we'll be around for a while. So we remain interested in shareholder value," Mr. Murray said.

Still, he noted that the fund, which inherited a large stake in Telstra when it was privatized by the government, is struggling to see where long-term incentive targets in the firm's remuneration report will deliver value.

"One of our issues is with the remuneration report and the way people are measured. In that program, there's been no communication of where the value comes from," Mr. Murray said.

The tough talk comes as Telstra's share price languishes around all-time lows, as concerns about the group's earnings outlook amid tough competition and uncertainty over continuing talks with Canberra and NBN Co.—the body set up by the government to run its planned A$43 billion national broadband network—weigh on investor confidence.

Telstra said Friday that talks with NBN Co. are progressing well and it expects to have a draft definitive agreement on its A$11 billion deal with NBN Co., which will see Telstra lease its fixed-line infrastructure to the new network and retire its own fixed-line copper network by Christmas.

Analysts said the Future Fund's decision to oppose the annual meeting resolutions is a vote of no confidence in Telstra from its biggest shareholder and could signal a further selldown in the Future Fund's stake over the coming period.

Asked if it is a loss of confidence in Telstra, White Funds Management fund manager Angus Gluskie said: "You bet."

"It's a pretty extreme statement really. If their voting was more specific, it might be suggestive that they were concerned purely about one or two specific issues. But voting against resolutions across the board is clearly a vote of no confidence," he said.

The Future Fund, which the government set up to fund public sector pensions, already has stated its intention to continue selling down its Telstra holding because it accounts for too much of its portfolio. Last month, it sold down its stake to 9.9% from 10.9%.

"They will be trying to find the best points to progressively exit a percentage of their holding over the next 12 months," Mr. Gluskie said. Mr. Murray said Friday any coming sell down "will take time."

It isn't the first time the Future Fund has publicly lashed out at Telstra and its board, and comes as Telstra battles falling revenues amid stiff competition from rivals including Singapore Telecommunications Ltd.'s Optus unit and Vodafone Australia.

Ms. Livingstone acknowledged that Telstra's share price performance has been disappointing and said the board views its shares as "materially undervalued." Telstra shares have fallen more than 20% in the past year, compared with a 2.5% drop for the broader market.

She pointed to the overhang of the Future Fund's stake as one of the key factors behind the underperformance.

Telstra said it expects its first-half earnings before interest, tax, depreciation and amortization to show a low-double-digit percentage decline, partly reflecting higher redundancy costs as Chief Executive
David Thodey
seeks to streamline the group's operations. Still, it retained its full-year guidance for a high single-digit decline in EBITDA.

But news that the group expects to maintain its dividend at 28 cents a share both this financial year and next cheered investors, allaying concerns that it could look to cut the payment next financial year. Telstra shares closed up 2.3% at A$2.62 on the back of the dividend news.